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Follower ○○

Shelter from the coming tax increase storm

 At 67, my concern is that state and federal governments will start looking for revenue to pay for the budget deficits COVID has created. I'm retired so increases in income taxes don't bother me as much as property taxes and taxes on "unearned" income. Millennials have little in the way of income and assets to tax. On the other hand, Baby Boomers generally own property and have retirement accounts. 

  Being retired, I also feel my tax rates are as low as they are likely to be. I haven't started taking RMDs yet. It seems like an opportune time to pull money out of tax deferred accounts, pay the taxes and move the assets to a Roth. If tax rates stay the same, I come out the same. If they go up, I and my beneficiaries come out ahead.

 This means I have less to live on/invest since I pay the tax burden now (above dirt) rather than my beneficiaries after inheritance. At any rate I would have to pay the taxes before I could spend the tax deferred assets above dirt.

 Are there any other negatives/drawbacks I am not seeing?

Thanks for your thoughts!

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Re: Shelter from the coming tax increase storm

You are worrying needlessly if you are already retired and have a modest income (<120K). Neither party is likely to sock it to you in 2021. Yes, state and local taxes and property taxes may go up - but the public wants services (police, fire/EMS, schools, roads, libraries, parks, Medicaid, etc.) and so they have to be paid for. Your name suggests you are from Tennessee - a low tax state. 

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Re: Shelter from the coming tax increase storm

@SJ60 @Tenndad 

You haven't given us much to go on, but, if you really have significant assets to give to heirs ... worrying about property taxes increases falls into the category of overthinking about things to worry about. 

However, before significant RMDs (they start rather small), it would likely be advisable to do T-IRA to Roth conversions within your tax bracket (perhaps even the next bracket if your current tax rate is really low). 

ctaynkee  

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Re: Shelter from the coming tax increase storm


@Tenndad wrote:

 ... It seems like an opportune time to pull money out of tax deferred accounts, pay the taxes and move the assets to a Roth. If tax rates stay the same, I come out the same. If they go up, I and my beneficiaries come out ahead.

Thanks for your thoughts!


Just to be clear, you are talking Roth Conversions, NOT "pull money out of tax-deferred accounts, pay the taxes, and move the assets to a Roth" (which is what you wrote above).

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Re: Shelter from the coming tax increase storm


@Tenndad wrote:

 At 67, my concern is that state and federal governments will start looking for revenue to pay for the budget deficits COVID has created. I'm retired so increases in income taxes don't bother me as much as property taxes and taxes on "unearned" income. Millennials have little in the way of income and assets to tax. On the other hand, Baby Boomers generally own property and have retirement accounts. 

  Being retired, I also feel my tax rates are as low as they are likely to be. I haven't started taking RMDs yet. It seems like an opportune time to pull money out of tax deferred accounts, pay the taxes and move the assets to a Roth. If tax rates stay the same, I come out the same. If they go up, I and my beneficiaries come out ahead.

 This means I have less to live on/invest since I pay the tax burden now (above dirt) rather than my beneficiaries after inheritance. At any rate I would have to pay the taxes before I could spend the tax deferred assets above dirt.

 Are there any other negatives/drawbacks I am not seeing?

Thanks for your thoughts!


Why are you worrying about fed govt raising taxes on the bottom 98% of taxpayers when US treasury can borrow an unlimited amount from the federal reserve at any time at less than 1.5%? If you can move money to a Roth without a big increase in taxes do it now.  You can make conversions to a Roth through age 71 before RMDs commence which gives you 5 years to lower RMDs. Remember all you have to do is move enough of your TIRA to a roth so you will not go into a higher tax bracket When you start RMDs.

if you have not commenced SS you should consider deferring to 70 while you are making Conversions To lower your taxes.

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Frequent Contributor

Re: Shelter from the coming tax increase storm

Hi Tdad...

Please make this easy and answer a few questions:

--What is your current marginal income tax rate...now?  This means, if you earned one more dollar, what fed IRS tax rate will it be taxed at?

--To what extent do you need to live off of RMDs?  Like, half?  Less than 10% of RMDs?  Do you make any IRA withdrawals now to live on?

--Do you know the tax brackets...or marginal tax rates, each of your heirs is in?  If unknown, do they make a lot of money; moderate amount, or lower range in pay??

--Are you taking social security now?  Spouse?

--Are you familiar with what a "Trad IRA conversions to Roth IRA," is??

Thanks in advance...

R48

 

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Participant ○○○

Re: Shelter from the coming tax increase storm

Speaking of "Tax Increase Storms", the taxing of Capital Gains (among other things) is potentially a football in the upcoming election: https://www.wsj.com/articles/capital-gains-tax-rate-chasm-separates-trump-biden-11597409062

or

https://www.cpapracticeadvisor.com/tax-compliance/news/21152588/election-2020-comparing-the-biden-an...

 

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Participant ○○○

Re: Shelter from the coming tax increase storm


@VA-Tech wrote:

Speaking of "Tax Increase Storms", the taxing of Capital Gains (among other things) is potentially a football in the upcoming election: https://www.wsj.com/articles/capital-gains-tax-rate-chasm-separates-trump-biden-11597409062

or

https://www.cpapracticeadvisor.com/tax-compliance/news/21152588/election-2020-comparing-the-biden-an...

 


@VA-Tech 

Sure ... it's potentially a political football with few in the stands.  

Why?  90% of voters have already made up their minds.  Additionally of the 10% that are undecided, 40% of those voters wouldn't know the capital gains tax rate if you put a gun to their head.  

ctyankee

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Frequent Contributor

Re: Shelter from the coming tax increase storm


@VA-Tech wrote:

Speaking of "Tax Increase Storms", the taxing of Capital Gains (among other things) is potentially a football in the upcoming election: https://www.wsj.com/articles/capital-gains-tax-rate-chasm-separates-trump-biden-11597409062

or

https://www.cpapracticeadvisor.com/tax-compliance/news/21152588/election-2020-comparing-the-biden-an...

 


The Biden income tax rate increase only applies to the top 2 brackets which only affect the top 1% of tax payers. Cap gains increase only applies to taxpayers with over $1M in gross income. Since I am in neither group I will not be affected even if Biden is elected.

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Participant ○○

Re: Shelter from the coming tax increase storm

I'm fortunate to be "old.' As a former state (university) employee, income from my main pension (TIAA 403b GRA) is exempt from state income tax in Michigan for my cohort (born before 1950).  Social Security income is also exempt from tax in MI. These exemptions are not likely to disappear. But other sources of income are a different matter, including income from my supplemental retirement funds and brokerage account.

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Re: Shelter from the coming tax increase storm

Are you a TN resident (Tenndad)? If so you must realize our state has very low property taxes compared to the rest of the nation.

I disagree millennials have "little in the way of income". Many salaries match 75% or my max salary at retirement.

And yes now is the time to convert to a Roth. Income taxes will go up one day. Count on it. But again we are lucky without a state income tax.


@Tenndad wrote:

 At 67, my concern is that state and federal governments will start looking for revenue to pay for the budget deficits COVID has created. I'm retired so increases in income taxes don't bother me as much as property taxes and taxes on "unearned" income. Millennials have little in the way of income and assets to tax. On the other hand, Baby Boomers generally own property and have retirement accounts. 

  Being retired, I also feel my tax rates are as low as they are likely to be. I haven't started taking RMDs yet. It seems like an opportune time to pull money out of tax deferred accounts, pay the taxes and move the assets to a Roth. If tax rates stay the same, I come out the same. If they go up, I and my beneficiaries come out ahead.

 This means I have less to live on/invest since I pay the tax burden now (above dirt) rather than my beneficiaries after inheritance. At any rate I would have to pay the taxes before I could spend the tax deferred assets above dirt.

 Are there any other negatives/drawbacks I am not seeing?

Thanks for your thoughts!


 

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Follower ○○

Re: Shelter from the coming tax increase storm

When the FBI captured the bank robber Willie Sutton, he was asked why he robbed banks. He is reputed to have said :"That's where to money is."  Households headed by individuals over the age of 65 have net worth 20 times that of households headed by individuals under 35 ($11,000 vs $224,000). Guess which household Congress is likely to rob.

https://www2.deloitte.com/us/en/insights/economy/issues-by-the-numbers/march-2018/us-average-wealth-...

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Re: Shelter from the coming tax increase storm


@Tenndad wrote:

When the FBI captured the bank robber Willie Sutton, he was asked why he robbed banks. He is reputed to have said :"That's where to money is."  Households headed by individuals over the age of 65 have net worth 20 times that of households headed by individuals under 35 ($11,000 vs $224,000). Guess which household Congress is likely to rob.

https://www2.deloitte.com/us/en/insights/economy/issues-by-the-numbers/march-2018/us-average-wealth-...


Well, Tenn, it takes both houses to pass anything so at mid-70's I'm not worried in the near future unless there is a  deep sweep.  Government on the Federal level as I remember it during my working years (compromise, reasonably good will) seems like it is long gone.

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Re: Shelter from the coming tax increase storm

"Rob?" 

From whose perspective?

As my internist is fond of saying--"adapt."

Bob 

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Re: Shelter from the coming tax increase storm


@Tenndad wrote:

When the FBI captured the bank robber Willie Sutton, he was asked why he robbed banks. He is reputed to have said :"That's where to money is."  Households headed by individuals over the age of 65 have net worth 20 times that of households headed by individuals under 35 ($11,000 vs $224,000). Guess which household Congress is likely to rob.

https://www2.deloitte.com/us/en/insights/economy/issues-by-the-numbers/march-2018/us-average-wealth-...


@Tenndad 

$11,000 versus $224,000 ... who will they go after?  

Answer:  Neither.  

Tenndad ... here is a song/video for you ... first minute only, mind you.  

https://www.youtube.com/watch?v=Dkk9gvTmCXY 

ctyankee

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Re: Shelter from the coming tax increase storm

Roth conversions should be looked at carefully. If in the future your tax rate goes up some unknown amount, will it go up more than your current taxes after accounting for your current tax bracket moving higher? How much you benefit from paying the taxes now also depends on how well your accounts grow. If it grows it grows substantially, your money is better advantaged in a Roth than if your accounts do not grow because RMDs will be less in the tax deferred accounts. Also the opportunity loss must be accounted for. Money paid in taxes now will be a loss of principal and be unable to grow in either account. 

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Re: Shelter from the coming tax increase storm

If you have enough wealth built up to comfortably set aside a portion for your beneficiaries without worrying about needing it in the future, you could also glean some tax benefits through an irrevocable living trust. It would mean that you and the trust are each taxed separately, which can change tax brackets. It can also bypass the estate tax if that's an issue. Not sure what your situation is, but it's something to think about.

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Re: Shelter from the coming tax increase storm

Hi.

Maybe more thoughts to ponder here. Maybe this is another; the government lies. I am old (83) and this is how it has gone. Soc. Sec., it will never be taxed (1950's), guess what? In the Army (1950's), these are your VA benefits. Guess what, they are means tested. I need to send the VA a copy of my most recent tax return to determine my elegibility. Those RMD's are killing me. My heirs will not get a step up on the equities they inherit? My heirs will have to withdraw the money within 5 years? A warning to the young; if you invest wisely over time, your RMD's will provide you an income and tax rate you never dreamed of when you were working. Start out with a Roth. So, to conclude, the IRS is getting a nice amount from us, but when the Roths kick in and we are gone, will the govt. lie again and tax those ROTHs?

 

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Re: Shelter from the coming tax increase storm


@MrGreen wrote:

If you have enough wealth built up to comfortably set aside a portion for your beneficiaries without worrying about needing it in the future, you could also glean some tax benefits through an irrevocable living trust. It would mean that you and the trust are each taxed separately, which can change tax brackets. It can also bypass the estate tax if that's an issue. Not sure what your situation is, but it's something to think about.


@MrGreen 

Not correct, as worded, for many trusts.  That's because trusts have the worst tax brackets by a long shot.  Income over $9,000 (which is precious little) in a trust gets taxed at the 35% bracket and at only $12+ you're at the 37% bracket. 

Most avoid that by having trusts that have the option of directing income to an individual yearly at the individual's much lower tax rate.  Other options include restricting trust assets to non-dividend paying stocks, or hard-to-price assets, etc.  Even then, if one of your significant stock positions gets bought by another, or starts distributing dividends  -  there can be some really ugly taxes if the trust doesn't have flexibility in income distributions.    

ctyankee

  

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Re: Shelter from the coming tax increase storm

@ctyankee 

Thank you for the correction! Much of what I had read mentioned only the estate tax benefits and left out the ugly income tax rates. 

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